Euro-Dollar Stuck Below 1.16 This Week
- Written by: Gary Howes
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But EUR/USD will recover if Trump backs down from threats to bomb Iranian electricity infrastructure.
The euro-dollar exchange rate opens the new week under pressure as geopolitical risks linked to the Iran conflict continue to favour the greenback.
EUR/USD trades at 1.1537, down from Friday’s close at 1.1571, with the dollar broadly supported by heightened tensions and ongoing attacks on regional energy infrastructure.
The focus now shifts to a key deadline set by U.S. President Donald Trump, who has demanded Iran reopen the Strait of Hormuz.
Failure to comply by tonight is expected to trigger U.S. strikes on Iranian electricity infrastructure.
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Iran has so far shown no signs of backing down, with further attacks on energy assets reported on Monday, reinforcing a backdrop that supports the dollar through higher oil prices and safe-haven demand.
This sets up a pivotal moment for currency markets:
If the U.S. follows through on its threat, the conflict would enter a more dangerous phase, raising the prospect of prolonged disruption to global energy supply and a further deterioration in risk sentiment.
In that scenario, EUR/USD could come under renewed pressure, with a move below 1.14 later in the week a realistic outcome.
However, positioning for further dollar strength is not without risk.
Markets remain alert to the possibility that the White House steps back from escalation at the last moment, a pattern that has in the past been dubbed the TACO trade - Trump Always Chickens Out.
Here, the U.S. refrains from attacking, signalling a reduced appetite for escalation that increases the likelihood that negotiations bring about an end to the conflict.
Such an outcome would likely trigger a reversal in recent market moves, with the dollar weakening and EUR/USD rebounding quickly from current levels.
Beyond the direct conflict, we're watching bond markets, where there are signs of a rapid increase in bets for higher European interest rates:
Above: The German 2-year bond yield surges as traders ramp up bets that the ECB will have to raise rates again later this year.
That of course is a result of expectations that rising oil and gas prices will jack up regional inflation.
"The US dollar’s upward momentum over the past week was dampened in part by the hawkish repricing of rate hike expectations outside of the US. European rate market have moved to price in multiple rate hikes from the BoE and ECB after their latest policy updates," says Lee Hardman, Senior, Currency Analyst at MUFG Bank Ltd.
He explains market participants expect European central banks to tighten policy in response to the energy price shock more than the Fed, contributing to yield spreads moving against the U.S. dollar.
That confirms there are numerous moving pieces in FX, that implies limits to EUR/USD downside.
